Indonesia Steps Onto the Stage

Every investor wants to buy into winning trends early. Fauzi Ichsan, senior economist at Standard Chartered Bank in Jakarta, says that the frontier market of Indonesia presents such an opportunity.

Indonesia, Asia’s second-largest oil producer behind China, has both a strong economy and a stable currency. Its economy is growing at 6.5 percent a year, Ichsan says, and its debt is low -- only 26 percent of gross domestic product. “Indonesia is the world’s third-largest democracy, after India and the U.S., and that democracy has surprisingly allowed the country to achieve political stability over the last 10 years and develop economically,” says Ichsan.

A big part of Indonesia’s attraction: Despite its commodity exports, its economy is focused mainly on the domestic market. Because it does not depend on exports of manufactured goods to the same extent as China, it’s much less vulnerable to an economic slowdown in Europe and the U.S. than China and other export-oriented economies in Asia are. Consumer Class

Driving Indonesia’s economy is a young, fast-growing middle class snatching up as many cars and TVs as their rupiah will allow. About two million people in the world’s fourth-most populous nation are abandoning the countryside every year and moving to cities. There, they work in factories, providing cheap labor to Indonesia’s nascent manufacturing sector.

So rapid is the growth that a Standard Chartered Bank report, which Ichsan helped author, says the country will move into the front rank of world economies over the next decade. That would make it one of the top 10 economies by 2020, and one of the top six economies by 2030. Ichsan says an impetus to its growth will likely be a hike in its sovereign debt rating, which rose to one notch below investment grade in the past year.

Lewis Kaufman, manager of the Thornburg Developing World Fund, is also optimistic about Indonesia. His fund has 9.7 percent of its assets invested there, a relatively high amount compared with other emerging market funds. Part of the appeal for Kaufman is Indonesia’s strong currency. Indonesia’s central bank has said a stronger currency will reduce inflationary pressure by lowering the costs of imported foodstuffs. Because exports are only about 20 percent of GDP, the bank feels no pressure to keep the rupiah weak to stimulate overseas sales.

Since the start of the year, the rupiah has gained about 2.5 percent, even though the country’s central bank cut its benchmark interest rate from 6.75 percent to 6.5 percent last month. “Ultimately, as a dollar-based investor, we think the currency outlook for Indonesia is robust, whereas it’s more questionable for a country like India,” Kaufman says. For Kaufman, a rising rupiah makes his investments in Indonesia more valuable. He adds that the rupiah has been supported by inflows of foreign direct investment, which should keep the currency rising modestly in the months ahead.

Kaufman is buying into Indonesia’s consumer sector through such companies as PT Indocement Tunggai Prakarsa, a cement producer. The company is running at about 75 percent capacity, he says, and growing between 6 percent and 8 percent a year. Indocement’s profit margins are among the highest in the world, thanks to the fact that it is one of the three cement companies in Indonesia that control 90 percent of the market. High Valuations

Banks will also benefit from a growing consumer class, so Kaufman owns PT Bank Mandiri. It has a loan-to-deposit ratio of 70 percent, he says, compared with European banks, whose ratio is closer to 120 percent. “Because of the level of consolidation in the Indonesian banking market, banks don’t have to lever up to drive the return for shareholders,” says Kaufman. “Instead, they are able to benefit from high growth and a relatively profitable banking environment.”

While Standard Chartered’s Ichsan says Indonesia is early in its economic ascent, that doesn’t mean its market is undervalued. Guy Uding, co-manager of the ING Emerging Countries Fund, says Indonesia represents only 3 percent of his fund’s assets because “valuations are rich.” In late October, Indonesian stocks traded at about 15 times earnings, compared with 11 times earnings elsewhere in Asia, he says.

Another drawback for the investors is the relatively low liquidity of shares, says Uding. PT Astra International, an auto conglomerate and the largest company in the JSX composite index, trades around $30 million in daily volume, he says. “Because of liquidity issues you are forced to trade only four or five stocks if you are an institutional investor,” he says. “That makes it difficult to have a sector allocation.”

Uding, like Kaufman, agrees that Indonesia will be an outstanding investment over the long term. “You have an economy growing at 6 percent, that has very high foreign exchange reserves, is not reliant on exports, and domestic demand is picking up.” That’s hard  to beat.

(Charles P. Wallace is a freelancer based in Manhattan.)

To reach the editor responsible for this story: Nikhil Hutheesing at

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